Extinguished Dues Cannot Be 'Resurrected' To Disqualify Resolution Applicant Under IBC: Supreme Court

The Supreme Court has recently held that once a company has been resolved under an approved insolvency resolution plan and all remaining dues stand extinguished, those dues cannot be "resurrected" to assess the eligibility of a prospective resolution applicant a year later.

It set aside orders that had declared Cosmic CRF Ltd ineligible to participate in the corporate insolvency resolution process of Amzen Transportation Industries Pvt. Ltd.

A Bench of Justices J.B. Pardiwala and Ujjal Bhuyan allowed appeals filed by Cosmic CRF Ltd. The Court set aside two orders of the National Company Law Appellate Tribunal (NCLAT) that had held the company ineligible and directed continuation of the insolvency resolution process from the stage of issuance of a fresh Form-G.

Observing that dues and claims extinguished under an approved resolution plan could not be revived for assessing eligibility, the Court held,

“All parties are bound by the terms of the plan and there are no outstanding dues or claims remaining in terms of Section 31 of the IBC, 2016. Since all remaining dues stand extinguished and the company operates on a clean slate, there is no question of such unpaid dues being 'resurrected' for the purposes of gauging eligibility in terms of Section 29A.”

The dispute arose from the corporate insolvency resolution process of Amzen Transportation Industries Pvt Ltd. Cosmic CRF Ltd submitted its resolution plan on June 28, 2024.

The NCLAT subsequently held the company ineligible. It reasoned that Cosmic CRF's Managing Director, Aditya Vikram Birla, was connected with Cosmic Ferro Alloys Ltd. (CFAL), whose account had been classified as a non-performing asset and which had undergone insolvency proceedings.

According to the NCLAT, although a resolution plan for CFAL had been approved in 2018, the financial creditors of CFAL had suffered a haircut. It held that the ineligibility could not be removed unless the outstanding dues were paid.

Rejecting that reasoning, the Supreme Court noted that CFAL's resolution plan had been approved on October 11, 2018. This was nearly six years before Cosmic CRF submitted its resolution plan. The Court said that CFAL stood fully resolved, a new management had taken over the company, and no dues remained outstanding when Cosmic CRF submitted its plan.

The Court observed that the NCLAT "could be said to have misinterpreted" the decision in ArcelorMittal India Private Limited:

“The NCLAT could be said to have misinterpreted the judgment of ArcelorMittal India Private Limited (supra) to hold the appellant to be ineligible under the first proviso to Section 29A(c) as in that case, the Resolution Applicant therein on the Resolution Plan submission date held an NPA where amounts were overdue. Such facts are not there in the present case. In fact, the judgment read in entirety advances the case of the appellant herein.”

The Court held that the relevant date for assessing eligibility was June 28, 2024, when Cosmic CRF submitted its resolution plan. It found that neither Cosmic CRF nor its connected persons held or controlled any non-performing asset account on that date.

The Court also found that Aditya Vikram Birla was never a promoter or director of CFAL. It noted that he held only 0.09 per cent shareholding in the company. The Court further observed that any shareholding held by him or his father in CFAL stood extinguished upon approval of the 2018 resolution plan. Thereafter, the management, control and shareholding vested in the successful resolution applicants.

Referring to the consequences of the NCLAT's finding, the Court held:

“In the present case, the appellant has been erroneously held to be ineligible under Section 29A only for the reason that the connected person of the appellant i.e., Aditya Vikram Birla is ineligible under Section 29A(c) of IBC. Such an erroneous finding of the NCLAT has irreversible drastic consequences as it will be tantamount to perpetually disqualifying the appellant to take part in any CIRP.”

Allowing the appeals, the Court declared Cosmic CRF eligible to participate in the insolvency resolution process of Amzen Transportation Industries. It directed that the appellant's resolution plan proceedings, as considered by the Committee of Creditors, be further processed in accordance with law.